Two-time finalist for Gerald Loeb Award - this year for Forbes magazine work and in 2010 for online commentary and blogging. I am a C.P.A. and freelance journalist with credits in the Financial Times, Boston Review, American Banker, Columbia Journalism Review, Accountancy Age, Accountancy Magazine, Forbes, and others. I also blog at my own site, re: The Auditors, a specialized news site about the business of the Big 4 audit firms. I have been quoted in the New York Times, Wall Street Journal, Chicago Tribune, Crain's Chicago Business, Chicago Magazine, Chicago Sun-Times, Financial Times, Reuters, Forbes, Harvard Business Review, BusinessWeek, American Lawyer, California Lawyer, American Banker, Columbia Journalism Review, The Times of London, The Guardian, the Financial Chronicle (India) and others. To reach me email fmckenna2010@gmail.com.

10/21/2011 @ 11:52AM2,361 views

Auditors In China: A Whole Lot of Posturing Going On

It’s difficult to come together when the parties in a dispute are not looking at the disagreement in the same way.

Two of the most important concepts in Chinese culture are guanxi and mianzi. Guanxi is defined as sharing favors between individuals, connections, relationships, and the ability to exert influence. Mianzi means face: saving face, losing face, and giving face.

Attempts by the SEC, and the PCAOB, to talk sense into Chinese regulators about auditor regulation and the problem of fraud in Chinese-based companies listed in the US is based on the preposterous assumption that all parties are speaking the same language.

What’s most disappointing is that the “babel” is both disingenuous and unnecessary.

Some recent major media stories attempt to illuminate the issues but only support the posturing that’s going on by the SEC, in particular, about what they can do now and what they did do from the beginning about the problems of sham companies listing on U.S. exchanges.

Peter Henning of The New York TimesDealBook “White Collar Watch” chimed in recently with a “poor, poor Deloitte” column. He laments the fact that the global audit firm is between a rock and a hard place when it comes to choosing between kowtowing to the Chinese or keeping U.S. regulators happy.

What Henning doesn’t mention is that the PCAOB knows, and the SEC knows, that Deloitte Shanghai and all of the audit firms registered with the PCAOB in China never agreed to submit to U.S. requests for information. They never checked that box on their registration form with the PCAOB. The PCAOB, and the SEC, accepted those conditions at the time of registration. According to PCAOB spokesperson Colleen Brennan, the PCAOB did expressly remind, via letter, all firms that declined to agree to cooperation requirements because of potential conflicts of laws that they were not off the hook. This, however, is the first test of legal wills based on that approach.

Unless the SEC plans to rescind all listings of issuers that are audited by an audit firm the PCAOB can’t inspect – the PCAOB is also prohibited from inspecting registered firms in the EU, for example – or where a US audit firm depends on a material portion of the audit from a network member firm in a country the PCAOB can’t inspect, they need to shut their posturing pie hole and figure out another way to shut down the reverse merger loophole and investigate the frauds. They have been looking the other way for years while the audit firms have grown by leaps and bounds in China and other parts of the world that prohibit inspections.

The SEC knows the documents they want about Longtop and other Chinese frauds can be retrieved from the Deloitte U.S. firm. Their original complaint to the court said so. I described how they could do it in a previous Forbes post. I told the SEC attorney on the phone I would explain to him exactly how to do it if he still did not get it.

China’s financial regulators have asked the world’s biggest audit firms to urgently review their work on U.S.-listed Chinese companies and give details on information they may have provided to overseas regulators, two sources told Reuters.

Talk about nuts. What are the Chinese going to do? Shut down email? The purpose of Chinese audit firms with global network relationships is to audit Chinese companies listed on non-Chinese exchanges and to support audits of Chinese subsidiaries of non-Chinese listed firms. A de-registration of those Chinese audit firms by the PCAOB, for example, or a shut down by Chinese regulators of outside contact by the Chinese firms would cripple global commerce.

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